Many people believe, and even more hope, that General Motors (GM) has a chance. As William Holstein put it in a recent Business Week article the company was on the verge of emerging as a leaner, more innovative, and more competitive company by 2010—until the financial crisis hit and paralyzed the economy.
In my last post GM's Natural Share Level an analysis of the company’s break-even market share gave it a chance to survive in the short-term if it shrank from 24% to 13% of worldwide sales – nearly half its current size – and slashed its selling and administrative costs by $2 billion per quarter. Management’s February 17, 2009 report to the U.S. Treasury Department made it clear they had no intention of shrinking the business.
Actually, GM has been underwater for over two decades and no one paid serious attention until its stock price nearly broke a dollar on March 9, 2009. Why? It’s complicated, but begins with this simple fact: Over the long haul there are really only two numbers in a financial statement that don’t give accountants plenty of wiggle room. Market cap and sales revenues are those numbers. Then it gets complicated because investors, financial analysts, and professors have yet to make a meaningful connection between market cap and revenue. Oh sure, there’s the price/revenue ratio. To which no one pays much attention because it’s idiosyncratic to the company.
One way to make a meaningful comparison between market cap and sales revenues is with a risk-adjusted strategic score that simultaneously tracks the performance of a company against competitors in the markets for both customers and capital. In Competing for Customers and Capital I defined just such a score. In economic-speak it’s the “risk-adjusted value-revenue differential.” Statistically speaking it’s a “standard normal control variable with mean zero and standard deviation one.” In practical terms, think of this metric as a “standardized performance score” [SPS].
The chart above shows how GM stacked up against TM over the last 8½ years on the SPS. In this chart the standardized performance score of a company is bounded by upper and lower control limits. These control limits define the normal range in performance between plus and minus two standard deviations from the mean. The mean of this score is exactly zero for an individual company. Over most of their live cycles, the lions share of companies in all industries operate within these limits and revert toward a mean SPS of zero.
Here’s the first takeaway from this article. If a company’s SPS is greater than +2 over a long period of time investors have rewarded management with a huge premium in its share of market value over and above its share of sales revenue. In short, when this happens, as it has for TM over 36 quarters, the company is in the business of continuous value creation.
Here’s the second takeaway. If a company’s SPS is less than -2 over a long period of time, this means that investors have punished management with a huge discount in its share of market value far below and beyond its share of sales revenue. In short, when this happens, as it has for GM over 36 quarters, the company is in the business of harvesting its base and destroying market value.
The number and size of companies included in this analysis matter very little – the SPS is insensitive to both the number and size of companies included. For example going all the way back to 1990 Toyota’s score ranged between +2.0 and +6.0, whether the analysis included a single small competitor or six of all sizes. TM scores were the same then as they have been in the last 8½ years. GM’s scores were in a range between -2.0 and -5.0 whether Chrysler and Nissan (NSANY) were included or not. And GM operated in the same range during that decade, as they have in the last 8½ years.
GM’s plight did not suddenly worsen in the past year. Investors have been telling GM management they were harvesting their base and destroying value ever since 1990.
What can GM learn from United Airlines?
When you’re running a high fixed cost business weighted down with union contracts, pension commitments and overwhelming health-care costs maybe it’s time to clean the slate by declaring bankruptcy. That’s what United Airlines (UAUA) did after delivering similar standardized performance scores year after year over the decade from 1994 through 2003. The following chart tells the story. If you want the details on how this analysis works, review my 19 minute audio slide show Y’all Buckle That Seat Belt.
Is there any other way out for GM at this point? What do you think?
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